Q: I listened to your show yesterday and you mentioned a formula regarding monthly vs. lump sum pension/retirement benefits. I am 65, cuurently on disability, and have some health issues regarding diabetes, hypertension and elevated cholesterol. I do not intend to retire at present and am currently considered an active employee. I am receiving long-term disability benefits at present. I will probably retire in early 2014. I really enjoy your show and comments on WSB.
A: Thanks for your question and thanks for listening to our show. When you analyze the benefits of taking a lump sum vs. monthly pension payments please consider the following. Whatever your lump sum is, figure that you could take about 5% a year as a withdrawal rate. For Example- $500k would provide $25k of annual income. Secondly, if you are married or have dependents you want to consider your options for beneficiaries. Often times if you take a monthly pension you may be able to leave part of your pension to a spouse or beneficiary by taking a reduced payout for yourself. However once your beneficiary passes away if there were any money left over it would likely not follow to other beneficiaries. If you manage the lump sum yourself at a 5% payout you very well may be able to pass this money further down to other beneficiaries. Lastly, you should think about the cash flow that you need. Once you lock in a pension you get that set amount for the rest of your life vs. having the ability to take more or less out while managing it yourself.
I hope this helps to give you some things to think about. Here at Capital Investment Advisors we offer a free one hour consultation. Feel free to contact us if you ever want to come in to discuss your situation if further detail.